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HIGH COST OF MILITARY PARTS

This is a digitized version of an article from The Times’s print archive, before the start of online publication in 1996.
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A thumb-sized plastic knob for the cockpit of the Navy's A-7 jet fighter can cost $400. A tiny machine screw for the Minuteman 2 missile can cost $36.77. A ring seal used in the engine of B-52 bombers can cost $2,020.50. And the Navy paid $435 for an ordinary hammer.

Selling spare parts to the military is a $13 billion-a-year business that Pentagon officials and defense-industry executives say is almost impossible to control. Perhaps more than in any other area of military purchasing, spare parts tend to be sold at huge markups under contracts that are signed without competitive bidding by manufacturers who are rewarded even if they deliver their products late.

But because the Defense Department buys them in small quantities and because they typically account for only a small fraction of a contractor's total sales, spare parts are rarely subject to close scrutiny. Officials say this means that rapid price increases are rarely challenged.

Large Cost Increases

In a recent survey of 15,000 frequently purchased spare parts, the Pentagon's Inspector General found that prices on 65 percent of the items surveyed had increased at least 50 percent between 1980 and 1982. Since the report was made public by the Project on Military Procurement, a Washington-based defense watchdog group, the Pentagon has said the numbers were overstated and the cost increases on the parts in question amounted to no more than 15 percent.

In a separate report, the Senate Armed Services Committee said that less than $3 billion of all spare parts orders are made on a competitive basis. And the General Accounting Office concluded that spare parts costs could be reduced 30 to 70 percent if there were more competition. But defense-industry executives say that would not be a panacea for spare parts problems.

''There is no perfect system,'' said John J. Welch, senior vice president for program development of the Vought Corporation. ''You're talking about billions being spent with contractors who are asked to produce very small quantities of things. That's very, very difficult to control.''

Accusations of Overcharging

In the last six weeks the Pentagon has accused 14 contractors of overcharging on spare parts. One was the Sperry Corporation, which billed the Navy $80,284 for a batch of electronics parts. Among those parts were $110 diodes that Secretary of Defense Caspar W. Weinberger said should have cost 4 cents each.

Without accusing the company of breaking any laws, Mr. Weinberger said the whole order should have cost $3,638, and demanded that Sperry repay the difference. Last month, the company did so, denying that it had overcharged but saying that it wanted to settle the matter.

Although Pentagon officials have concluded that some of the responsibility in the Sperry case lies with Navy purchasing officers, the case raised the question of how spare parts prices are determined. Before it signed the contract, the only thing the Pentagon checked was that Sperry had used an accepted accounting formula to arrive at its prices, not whether the prices it had plugged into the formula were reasonable.

Contract Terms

''Our contract negotiated with the Navy provided that these costs be averaged equally over each line item of spares purchased,'' said Camille Sciortino, a Sperry spokesman. ''This procedure should result in an equitable overall price to the Government, although apparent price distortions on individual items can occur.''

In another case, the Gould Corporation's Systems Simulation division sold the Pentagon a sledgehammer for $436, a claw hammer for $435 and a measuring tape for $437. Gould bought all three items for less than $35.

Gould paid the Navy $84,000 last month, based on Navy estimates of the disputed charges, subject to a forthcoming Pentagon audit. Thomas Sommers, Gould's director of public affairs, declined to discuss the case in detail, and the Navy said there was no indication of improper or illegal conduct. But the Navy and the company issued a joint statement saying that there was an appearance of ''large overcharges for individual items.''

Gould officials have told staff members of the House Armed Services Committee that the high markups resulted from the way Defense Department requires contractors on some military projects to bill overhead. In general terms, overhead covers the broad range of costs of making a spare part - from the property taxes on the plant and the utility bill to such capital purchases as the forklift truck used to haul the parts across the warehouse.

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Using a hypothetical example, Gould told the committee's staff that if it sold the Pentagon three items and its overhead was $1,200, then it had to divide the $1,200 by three and add $400 to the price of each item. This, even though the overhead might have been $50 on the simplest of the three items and $1,000 on the most complex.

Gould told the committee that it would be fairer to calculate overhead on a percentage basis, so that small things - such as a hammer - would not end up costing disproportionately more than larger items - such as an oscilloscope.

Depending on the provisions of the contracts they hold, not every company follows that method. The Grumman Aerospace Corporation, for example, uses a proportional system for spare parts on the F-14 jet fighter its manufactures for the Navy.

''If you go out and buy a spare for $1 and spend 6 man-hours to receive it, inspect it, pack it and ship it at an average rate of $50 an hour, the price is $301,'' said P. S. Vassallo, a Grumman vice president in Bethpage, L.I. ''Rather than charge that, we pool the costs of everything we buy, large and small, so that the Government pays only $1.30.''

Layers of Cost

But officials say the more important question is whether the Pentagon should buy parts from contractors that do not manufacture them, a process that critics say means the Government is paying for layers of additional costs.

Last year, for example, the Navy bought an airplane test rack from the McDonnell Douglas Corporation. According to staff members of the House Armed Services Committee, McDonnell Douglas bought the rack fully assembled from one subcontractor, which put it together using parts it bought from the manufacturer. Each contractor added a layer of overhead that the Navy paid in its final price.

But the G.A.O. said, ''The saving of money on individual buys and the possibility that the money saved could buy a greater quantity of needed items in the future is something viewed as a relatively distant and uncertain benefit. Until this perception is changed, it will be difficult to achieve a much better rate of competition.''

Sometimes, though, competition might not make a difference. Mr. Welch at Vought said his company charged the Pentagon $300 for replacements for a plastic knob on the A-7 aircraft. When it was new, he said, the knob probably cost no more than 50 cents.

But by the time the replacement was needed, the subcontractor that had made the original knob had gone out of business. Instead of taking time to find other subcontractors and waiting for them to file competing bids, the company made its own mold and manufactured the half-dozen knobs itself - a process it says was costly because it is not normally in the plastics business.

Another aspect of the spare parts controversy is the difficulty the Pentagon has in controlling its own inventory system. Some officials say it is so primitive that it is often impossible to tell whether the spare part is already on hand.

Critics say a better computer system that could check Government product codes would eliminate wasteful ordering. It could also help reduce costs. One day last fall, for example, the Pentagon bought 100 washers from Boeing for $47.51 apiece. The following day, it bought 190 more at $18.11 apiece. Critics say the prices could have been lower if the Government had bought all 290 at once.

A version of this article appears in print on September 1, 1983, on Page D00001 of the National edition with the headline: HIGH COST OF MILITARY PARTS. Order Reprints|Today's Paper|Subscribe